New to Roth IRA investing - Vanguard?

[MVal]

I currently have a Roth IRA at Merrill Lynch just because I have my banking with Bank of America, but so far I haven't invested any of the money in anything yet. I have $7600 just sitting in that account and I have no idea what I'm doing! From what I've read, Merrill Lynch sucks and I should get a Vanguard account instead. But I am so clueless about investing, I have no idea what to invest my money in once I get it there. I know per MMM, index funds are best--so what does one typically do, put all your money in one fund, or do you pick several? I have never bought stocks before, so I'm kind of scared.

Any Mustachians who can help out a rookie with some basic recommendations would be appreciated!

[tarheeldan]

You might start with:

Developing an investment policy statement: http://www.bogleheads.org/wiki/Investment_policy_statement

And there's lots of good info in JLCollinsNH stock series: http://jlcollinsnh.com/stock-series/

I do see a lot of simple 3-fund strategies around here: X% VTSAX (domestic), Y% VTIAX (international), Z% VBTLX (bonds)

[MDM]

For someone in your situation, putting it all in VTTSX could be appropriate.  Google  VTTSX  and see if that fits your desires.

[mrmiyagi]

I was in your shoes not too long ago. The absolute simplest answer is to put it in one of the Vanguard target retirement funds. Those funds are already diversified for you, and you can just buy one fund and then forget about it. A list of all Vanguard funds is here: https://investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list

If you want to go a little more in depth, start here: http://www.bogleheads.org/wiki/Three-fund_portfolio

Good luck!

[seattlecyclone]

Yes, start with a target retirement fund. It has reasonably low costs and a reasonable asset allocation. Once you put your money there, read up on what an asset allocation is and why you would choose one over another. At that point you might start to develop opinions about how the target retirement fund has allocated your money. If you're happy with that allocation, stay the course. Otherwise pick a couple of other funds to invest in, with a ratio that you like better.

[TomTX]

Just don't start splitting to multiple funds. You don't have enough money yet. Splitting world just add confusion and distraction.  Wait til you are in the $50k to $250k range. If you pick a target date fund you can just stick with that forever.

The fine details of particular indexes are meaningless compared to just getting that cash invested rather than sitting on the sidelines. 

If you invest in stocks, you will see a crash. But it will have the best chance of long term growth.

So use a target date fund, or S&P500 index, or total stock market. Whichever.  Just invest.

Rolling to Vanguard first makes sense though.

[unmetamorphosed]

I was in your position a few weeks ago. I rolled over my non-Vanguard Roth IRA into a Vanguard Target Retirement Fund (specifically 2055 VFFVX).
Target Retirement Funds are already diversified and are automatically readjusted, but you can also change asset allocation yourself if you wish.

It's a simple and easy way to start while I'm properly educating myself about further investments.

[MVal]

Thank you everyone, this is great. I just called Vanguard today and they did suggest the target retirement fund that auto-adjusts the mix of stocks vs bonds as I age. I suppose since I am not too investment savvy yet, this is a good place to start, especially since you've pointed out I'll be able to change the mix any time I wish.

[expectopatronum]

Just don't start splitting to multiple funds. You don't have enough money yet. Splitting world just add confusion and distraction.  Wait til you are in the $50k to $250k range. If you pick a target date fund you can just stick with that forever.

The fine details of particular indexes are meaningless compared to just getting that cash invested rather than sitting on the sidelines. 

If you invest in stocks, you will see a crash. But it will have the best chance of long term growth.

So use a target date fund, or S&P500 index, or total stock market. Whichever.  Just invest.

Rolling to Vanguard first makes sense though.

Question for Tom: What's the reasoning behind not splitting into multiple funds? I like that approach for simplicity's sake, but does this go against the typical "diversify" advice, or does it even matter because these are index funds?

[seattlecyclone]

Index funds are already quite diversified in the asset sectors they cover. Vanguard's target retirement funds invest in the total US stock market fund, the total US bond market fund, the total international stock market fund, and the total international bond market fund. You basically own a little piece of everything with just that one fund. Can't really get more diverse than that! You might still want to buy another fund if you think the target retirement fund has too little of one asset class or another, but you're not adding diversity by doing this. You're just changing the weightings.

[Rollin]

Just don't start splitting to multiple funds. You don't have enough money yet. Splitting world just add confusion and distraction.  Wait til you are in the $50k to $250k range. If you pick a target date fund you can just stick with that forever.

The fine details of particular indexes are meaningless compared to just getting that cash invested rather than sitting on the sidelines. 

If you invest in stocks, you will see a crash. But it will have the best chance of long term growth.

So use a target date fund, or S&P500 index, or total stock market. Whichever.  Just invest.

Rolling to Vanguard first makes sense though.

Question for Tom: What's the reasoning behind not splitting into multiple funds? I like that approach for simplicity's sake, but does this go against the typical "diversify" advice, or does it even matter because these are index funds?

I know that works for those of you that are more comfortable investing, but I for one am more reluctant to invest if I get to a point that I cannot keep track of things or I don't understand where I am invested.  One fund in Vanguard is great for me.  Confidence instills better investment behaviour for me.  YMMV

[MVal]

I have the majority of it now invested in the target date fund 2045 and the rest in VTSAX. This is a Roth, but I am thinking of next year starting a traditional IRA to get more tax benefit.

[MDM]

I have the majority of it now invested in the target date fund 2045 and the rest in VTSAX.

Effectively, the target date fund also has 54% of its money in VTSAX.  If you wanted to hold VTSAX separately to overweight those stocks, all is well.  But if you wanted VTSAX for "diversification"....

This is a Roth, but I am thinking of next year starting a traditional IRA to get more tax benefit.

If getting the tax benefit this year would be advantageous, you should recharacterize your 2015 Roth contributions to traditional.  See https://www.bogleheads.org/wiki/IRA_recharacterization.

[MVal]

I have the majority of it now invested in the target date fund 2045 and the rest in VTSAX.

Effectively, the target date fund also has 54% of its money in VTSAX.  If you wanted to hold VTSAX separately to overweight those stocks, all is well.  But if you wanted VTSAX for "diversification"....

Ah, I was not aware of that. I think I started putting money in VTSAX because it appeared to get a higher return over the long term than Target date fund.

This is a Roth, but I am thinking of next year starting a traditional IRA to get more tax benefit.

If getting the tax benefit this year would be advantageous, you should recharacterize your 2015 Roth contributions to traditional.  See https://www.bogleheads.org/wiki/IRA_recharacterization.

Very cool! I've been on the fence about continuing to fund my Roth or start a tIRA just for the simple fact that I know I could always withdraw the Roth money at any time with no penalty if an emergency arose, or if I need to take a bit out for a house down payment. If I leave all my funds this year in the Roth, I'll have $13K there. Then next year, if I really buckle down on funding my 401K and I do the tIRA, I could get the Savers Credit on my taxes.

I did not fund my 401K very aggressively this year due to a need to build a liquid emergency fund, so even if I convert my 2015 Roth contributions to tIRA, I still won't qualify for the Saver's Credit. Although the tax benefit is nice even if one is not getting the credit, I'm sure.

[TomTX]

Just don't start splitting to multiple funds. You don't have enough money yet. Splitting world just add confusion and distraction.  Wait til you are in the $50k to $250k range. If you pick a target date fund you can just stick with that forever.

The fine details of particular indexes are meaningless compared to just getting that cash invested rather than sitting on the sidelines. 

If you invest in stocks, you will see a crash. But it will have the best chance of long term growth.

So use a target date fund, or S&P500 index, or total stock market. Whichever.  Just invest.

Rolling to Vanguard first makes sense though.

Question for Tom: What's the reasoning behind not splitting into multiple funds? I like that approach for simplicity's sake, but does this go against the typical "diversify" advice, or does it even matter because these are index funds?

I know that works for those of you that are more comfortable investing, but I for one am more reluctant to invest if I get to a point that I cannot keep track of things or I don't understand where I am invested.  One fund in Vanguard is great for me.  Confidence instills better investment behaviour for me.  YMMV

Yep. That's a big part of it. Comfort. Get a good index or target date fund and you can understand it and be comfortable with it.

To address the above: A reasonable index fund already IS a big chunk of diversification. The whole "Diversify!" mantra started really to address folks like my grandparents. They had 3 individual stocks and CDs. That's it. If you are in the S&P 500 fund, you are invested in FIVE HUNDRED FUCKING COMPANIES - and not just your local utilities like my grandparents. You have the 500 biggest companies in the USA, most of which are themselves multinationals. Compared to buying individual stocks, you are WAY diversified. If you are in the Total Stock Market, you are invested in THOUSANDS of companies.

Is a target date fund better? Possibly. Some international? Possibly. But that's really just fiddly details. Get a good broad index or target date fund. Low fees. Tax efficiency (ie, use your IRA/401k if you can) - you get someone a really, really good solution with very little effort, maintenance or further thought. It's really not WORTH thinking about til you actually have sizeable assets.

I've seen way too many case studies here where someone has a few thousand bucks and some high-priced "advisor" has gotten them to split the money to a dozen (or more!) different funds. They have no idea what's going on, most of the funds are expensive and duplicative - offering little if any actual increase in diversification - and it keeps up the pretense that high paid advisors are necessary because of all this worthless complexity.  Instead of a broad index that has everything, they will have penny packets in "small cap value" "large cap growth" "REIT" and a bunch of actively managed bullshit - all of which pretty much add back to... S&P500 or TSM, but with more taken out in fees.

I also see people who should be focusing on their lives going down the rabbit hole of ever more esoteric asset allocations when they have maybe $10k, $20k.  At that point, it's just a distraction. Get your lifestyle under control, enjoy life, get badass, put money aside.

So, that's a chunk of why I'm in favor of simplifying, ESPECIALLY for someone learning to do it on their own. It's good enough. It's easy to understand. It's comfortable. 

[MVal]

Just don't start splitting to multiple funds. You don't have enough money yet. Splitting world just add confusion and distraction.  Wait til you are in the $50k to $250k range. If you pick a target date fund you can just stick with that forever.

The fine details of particular indexes are meaningless compared to just getting that cash invested rather than sitting on the sidelines. 

If you invest in stocks, you will see a crash. But it will have the best chance of long term growth.

So use a target date fund, or S&P500 index, or total stock market. Whichever.  Just invest.

Rolling to Vanguard first makes sense though.

Question for Tom: What's the reasoning behind not splitting into multiple funds? I like that approach for simplicity's sake, but does this go against the typical "diversify" advice, or does it even matter because these are index funds?

I know that works for those of you that are more comfortable investing, but I for one am more reluctant to invest if I get to a point that I cannot keep track of things or I don't understand where I am invested.  One fund in Vanguard is great for me.  Confidence instills better investment behaviour for me.  YMMV

Yep. That's a big part of it. Comfort. Get a good index or target date fund and you can understand it and be comfortable with it.

To address the above: A reasonable index fund already IS a big chunk of diversification. The whole "Diversify!" mantra started really to address folks like my grandparents. They had 3 individual stocks and CDs. That's it. If you are in the S&P 500 fund, you are invested in FIVE HUNDRED FUCKING COMPANIES - and not just your local utilities like my grandparents. You have the 500 biggest companies in the USA, most of which are themselves multinationals. Compared to buying individual stocks, you are WAY diversified. If you are in the Total Stock Market, you are invested in THOUSANDS of companies.

Is a target date fund better? Possibly. Some international? Possibly. But that's really just fiddly details. Get a good broad index or target date fund. Low fees. Tax efficiency (ie, use your IRA/401k if you can) - you get someone a really, really good solution with very little effort, maintenance or further thought. It's really not WORTH thinking about til you actually have sizeable assets.

I've seen way too many case studies here where someone has a few thousand bucks and some high-priced "advisor" has gotten them to split the money to a dozen (or more!) different funds. They have no idea what's going on, most of the funds are expensive and duplicative - offering little if any actual increase in diversification - and it keeps up the pretense that high paid advisors are necessary because of all this worthless complexity.  Instead of a broad index that has everything, they will have penny packets in "small cap value" "large cap growth" "REIT" and a bunch of actively managed bullshit - all of which pretty much add back to... S&P500 or TSM, but with more taken out in fees.

I also see people who should be focusing on their lives going down the rabbit hole of ever more esoteric asset allocations when they have maybe $10k, $20k.  At that point, it's just a distraction. Get your lifestyle under control, enjoy life, get badass, put money aside.

So, that's a chunk of why I'm in favor of simplifying, ESPECIALLY for someone learning to do it on their own. It's good enough. It's easy to understand. It's comfortable.

Great advice, Tom, I like this. I'm not a high roller yet, so I guess there's really no need to put so much pressure on myself to find the "right" investment mix. This coming year, maybe I will focus more on developing myself rather than my "portfolio" and not worry about the money so hard. I'm not going to be making any Earth-shattering decisions on my life at my financial level. But I am eager to make my first $100K in net worth! I'll be at $50K at the end of the year.